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The Numbers Behind the Farm Bill: the Commodity and Conservation Titles

July 13, 2017

US Capitol. Credit: USDA

Editor’s Note: This is the second of a four-part series explaining the background budget information that will be used to craft the upcoming 2018 Farm Bill. In this post we look in more detail at the commodity and conservation titles of the farm bill. In part three will focus on programs that will need to have their funding renewed in the next farm bill, and in part four we will give more attention to the bill’s Nutrition Title. In an effort to simplify the complex subject of farm bill funding, we will present these blogs in FAQ format.

This series was inspired by the late June publication by the Congressional Budget Office (CBO) of a new 10-year budget baseline projection for the farm bill. The CBO baseline provides the backdrop for farm bill spending decisions, since it establishes farm bill program costs assuming no changes are made to existing policies. As policy changes are made by Congress when crafting the farm bill, each change will be “scored” against the baseline to determine if the policy change increases or decreases farm bill spending, and by how much.

What Influences the Cost of Farm Bill Commodity Programs?

The cost of the Commodity Title is driven in part by changes in commodity prices. In a variety of ways, the cost of commodity program subsidies fluctuate counter to changes in commodity prices; i.e., when commodity prices are down, PLC subsidy payments are up, and vice versa. When the 2014 Farm Bill was passed, the Congressional Budget Office (CBO) assumed that commodity prices would be higher than they are today. However, following several years of low commodity prices, we are now experiencing higher than average commodity program payments rates. Overall, CBO’s 10-year projection for commodity program subsidies in the 2018 Farm Bill is $13 billion higher than the projections from the 2014 bill.

Given the constant fluctuations of the markets, future budget projections could change depending on whether prices move up or down by a significant amount. The cost of corn and rice payments, for instance, has increased in the past year because of weaker markets. Conversely, the cost of peanut and soybeans payments has declined in the past year due to a tightening of supplies which has resulted in higher prices.

A second major reason for fluctuations in the cost projection for commodity subsidies is due to the impact of a budget process known as sequestration. When dealing with programs that have mandatory funding (such as farm bill commodity subsidies and most conservation program payments), sequestration triggers automatic annual budget cuts. This takes place in lieu of the traditional process, wherein Congress would be doing the work of deciding which, if any, programs should be scaled back or eliminated for deficit reduction purposes.[1]

Sequestration plays havoc with CBO budget baselines because it is the White House Office of Management and Budget, not CBO, which determines the annual sequestration rate (which is based on a formula). This means that the CBO baseline adjusts for sequestration only after the fact, not in advance, and thus the 10-year projected totals for commodity subsidies will actually be at least five or more percent lower than presented in the current baseline, given recent trends in the sequestration formula.

Lastly, the biggest driver of the increasing commodity program subsidy baseline is a policy-related one. Rather than creating a uniform commodity policy in the 2014 Farm Bill, Congress engineered the bill with multiple program options – each geared to a particular crop or region of the country. This meant that farmers then had to choose between one of several options. For instance, corn and soybean growers on the whole chose a more market-oriented, revenue-based option, while rice and peanut growers mostly went with a more traditional government-set price option.

For the next 10-year period, CBO assumes that given the current commodity price projections, most farmers will choose the more traditional price-based option in the years ahead as it would result in higher subsidy payments. Since CBO baselines assume continuation of current law, the built-in assumption is that the 2018 Farm Bill will give farmers the same options as last time. Furthermore, CBO assumes that the choice by the majority of corn, soybean, and wheat farmers will be the opposite of what it was last time, since PLC would yield higher payment rates than the more market-oriented approach.

These baseline assumptions by CBO are reasonable but they also reveal a major flaw in the crafting of the 2014 Farm Bill. Rather than create a coherent commodity subsidy policy, Congress opted to allow producers to select for whichever option maximized their flow of taxpayer-provided subsidies. Whether Congress addresses this shortcoming remains to be seen, but the state of the conversation to date suggests that the same multiple-choice policy structure likely will remain in effect.

What Are the Potential Impacts of the New CBO Baseline on Policy Decisions?

Other things being equal, under current market conditions the selection of a more market-oriented approach to the commodity title in the 2018 Farm Bill would likely reduce total government costs. Conversely, a continuation of Congress’ 2014 multiple-choice approach (or solely a traditional government-set price approach) would likely cause government outlays to stay at the same levels, or even rise.

Beyond the big architectural issues and choices, however, what is the impact of the new baseline on individual policy proposals? In general, the higher commodity program baseline means that proposed policy changes to increase commodity subsidies would cost more than they would have in 2014. Hence, for example, proposals to raise government-set target prices, to better equalize payments rates between contiguous counties, or to allow farmers to increase the production yields that payments are based on would all be more costly in 2018 than would have been the case in 2014. Any actions to increase subsidies would necessitate new funding, which would have to be cut from somewhere else in the bill; in contrast, a continuation of current policy would require no cuts or redistribution of funds.

By the same token, any proposal to tighten subsidies per farm or to cap the percentage of acres eligible for subsidies would yield greater savings than would have been the case in 2014.

Why Has Conservation Spending Fluctuated?

Unlike most programs that the farm bill funds directly, farm bill conservation programs have routinely suffered cuts to mandatory funding during the annual appropriations cycle through a process called changes in mandatory program spending (or CHIMPS for short). Though technically not within the purview of the Appropriations Committees, appropriators have nonetheless for years used this backdoor mechanism to cut mandatory farm bill funds from conservation programs. In the four fiscal years since passage of the 2014 Farm Bill, CHIMPS have been used to rob $1.6 billion from farm bill conservation programs.

Just like with commodity subsidy rates, another factor affecting conservation program funding is sequestration. Since the passage of the 2014 Farm Bill sequestration has taken a nearly $1 billion bite out of conservation funding. And lest we forget, all this cutting around the edges is also in addition to the giant $4 billion cut made to conservation programs in the 2014 Farm Bill.

While the most recent baseline estimate does not factor in future decreases due to sequestration or from future CHIMPS, it does take into account built-in increases in costs from the two acreage-based conservation programs – the Conservation Reserve Program (CRP) and Conservation Stewardship Program (CSP).

CRP is currently at its maximum capacity for enrolled acres (24 million), and is projected to stay at maximum capacity through the coming decade, barring policy changes. That fact, plus periodic revisions to the farmland rental costs that determine CRP rental payment rates, results in a baseline that is $1.5 billion higher for the next 10 years than the baseline developed in 2014.

CSP enrolls 10 million acres each year on a long-term contract basis. Because it is long term and also includes an option to renew, the total size of CSP grows over time. Hence, the newly revised 10-year cost of CSP, which reflects the tens of millions of program acreage added since 2014 and projects further into the future than the 2014 baseline, is $2.6 billion greater than the last 10-year projection.

On a net basis, the newly revised baseline for farm bill conservation programs is $3.4 billion greater than in 2014.

Why Does Congress Need Additional Funding for the Conservation Title in 2018?

Although the farm bill’s major conservation programs all have “permanent” funding status, meaning if Congress does nothing next year but reauthorize current law the programs will continue running at their authorized funding levels, most farm and conservation groups would like to see investments increased. This increase is needed because farmer interest in and need for conservation programs has been steadily growing, and because resource and environmental issues related to agriculture remain daunting. As it stands, the US Department of Agriculture (USDA) routinely has to turn away qualified farmer applicants from conservation programs. Nearly all of USDA’s voluntary conservation programs have far more applicants each year than they have funding to support their programs.

While a strong case can and will likely be made for each of the farm bill conservation programs, one program stands out above all the others as needing and deserving additional funding. In the 2014 Farm Bill, Congress created the Agricultural Conservation Easement Program (ACEP) by combining several existing easement-based programs (wetland restoration, grasslands protection, and farmland preservation) under a single umbrella. The consolidation had broad support within the conservation community. However, in consolidating the programs Congress also reduced the overall funding line to less than half the previous level.

There is broad consensus within the farm conservation community that in the 2018 bill, ACEP funding must be doubled (an increase of $250 million per year) at a minimum in order to meet the need for the program. Targeting additional conservation dollars toward ACEP is important not only because the program contains multiple natural resource preservation and restoration mechanisms, but also because the easements under ACEP result in long-term conservation.

Look for parts three and four of our “Numbers Behind the Farm Bill” series to be published in the coming days.

[1]Sequestration affects commodity programs and most conservation programs, but not nutrition programs, crop insurance subsidies, or the Conservation Reserve Program (CRP). Congress exempted nutrition programs and CRP by statute, and the Obama White House exempted crop insurance subsidies by administrative fiat.